Prolonged airspace ban over Iran, Iraq could cost airlines dearly

Singapore – Did a missile, or even missiles, bring down Ukraine International Airlines flight PS752 in a Tehran suburb earlier this week, killing all 176 people on board, a few hours after Iranian forces launched attacks against military bases hosting United States forces in Iraq?

Western officials seem to be raising the possibility that a missile strike – whether intentional or not – did cause the tragedy. Iran has dismissed the comments by Canada and Ukraine suggesting a missile attack may have been responsible.

But if it was the cause, it would seem to vindicate the decision this week by the US Federal Aviation Administration (FAA) to ban US carriers from operating in the airspace over Iraq, Iran and the Gulf of Oman, as well as the waters between Iran and Saudi Arabia.

The European Aviation Safety Agency also recommended that EU-based commercial airlines avoid Iraqi airspace, prompting many carriers to reroute or cancel operations through the region.

But those decisions, while prudent, could add to the commercial and operational problems of many Asian and European airlines whose planes have to pass over the Middle East while travelling between Asia and Europe, aviation analysts say.

Intense competition, a global economic slowdown, rising fuel prices and pressure from regulators to reduce emissions are some of the pressures already squeezing many carriers’ profit margins.

A protracted rerouting of commercial aviation from Iranian and Iraqi airspace will mean longer flights and higher fuel costs for long-haul carriers in the Asia-Pacific region.

And that could translate into significantly higher prices for passengers.

“When you have an airspace closure, air transport and airlines see a significant impact to their operating costs and their flight times as a result of them circumventing airspaces whilst finding alternate routes,” aviation consultant Mark Martin told Al Jazeera.

“In such situations, the effective cost of tickets dramatically shoots up for the traveller by nearly 50 percent. The effective increase in flight time would be between 45 minutes to one hour depending on the type of aircraft,” he added.

Approximately 1,000 commercial planes fly through Iranian and Iraqi airspace each day, Albert Tjeong, assistant director of corporate communications for the Asia-Pacific region at the International Air Transport Association (IATA), told Al Jazeera.

Taking the long way round

“At the moment many carriers in Southeast Asia and Oceania have started to reroute their flight paths to Europe in line with the FAA’s move,” Shukor Yusof, founder of Malaysia-based aviation consultancy Endau Analytics, told Al Jazeera. “Long-term this will have an adverse effect on an air carrier’s bottom line as a new route requires extra fuel burn, and possibly a mid-point transit.”

Oil prices initially surged on Wednesday to a near four-month high following the Iranian missile strikes on Iraqi military bases. Those were retaliation for the US strike that killed Qassem Soleimani, the leader of Iran’s elite Quds Force, a unit of the country’s military.

The markets have since stabilised as investors see a de-escalation in US-Iran tensions, at least for now.

But oil prices have been on a steady rise for months. Brent crude has risen nearly 23 percent since early August, and they are up almost 37 percent since the end of 2018, according to data by Refinitiv.

Greg Waldron, Asia managing editor of aviation news site FlightGlobal, says oil prices could rise further if tensions around Iran worsen.

“That would be bad news for the airline industry globally because it’s going to influence fuel prices, and that’s going to impact profitability,” Waldron told Al Jazeera.

Other consequences could include weakened consumer confidence in air travel and increased jet emissions, Waldron said.

Even though airline profits have been growing recently, and may continue to do so in the short term, some forecasters see financial storm clouds on their radar screens.

In an industry outlook released every six months, IATA in December expressed optimism for the new year, forecasting the global airline industry will produce a net profit of $29.3bn in 2020, up 13 percent from a net profit of $25.9bn expected for 2019.

IATA predicted Asia-Pacific carriers will be helped in 2020 by a modest recovery in world trade and air cargo, showing a $6bn net profit in 2020 (up from $4.9bn in 2019) for a 2.2 percent net margin, the ratio of a company’s after-tax profits to its revenue.

“Asia remains the manufacturing center of the world and revenues from transporting many of those goods are a significant proportion of sales for many of the region’s airlines,” the IATA report said.

“But the trade war [between the US and China] is assumed just to be on hold; trade tariffs are not reversed. Consequently, the rise in trade and cargo volumes is moderate.”

Feeling the squeeze

IATA says many airlines around the world are already struggling due to the global economic slowdown, trade wars, geopolitical tensions, social unrest such as in Hong Kong and lingering uncertainties surrounding Brexit.

And despite the rosy headline profit figures, profit margins are tight. IATA estimates the projected 2020 net profit per passenger for Asia-Pacific carriers at $3.34, compared with a global average net profit per passenger of $6.20 ($5.70 in 2019).

Major air carriers in Southeast Asia, including Singapore Airlines, Thai Airways, Malaysia Airlines, and Hong Kong-based Cathay Pacific, struggled with financial difficulties in 2018 and 2019, according to their respective annual reports.

Following Wednesday’s early morning missile strike, British Airways, Singapore Airlines, Malaysia Airlines, Qantas, Germany’s Lufthansa and Air France-KLM were among airlines charting new routes to go around Iraq and Iran.

Many flights have been avoiding Iranian and Iraqi airspace by taking a more northerly route over Afghanistan and Pakistan or a more southerly route over Saudi Arabia and Egypt.

Among those still using Iranian and Iraqi airspace, which remains open, is Qatar Airways, which is banned from flying over Saudi Arabia.

“The current re-routes will add some time to flights, but the actual disruption to traffic is minimal,” Ian Petchenik of flight-tracking website Flightradar24 told Al Jazeera. “However, given the congested nature of the airspace in the Gulf area, any escalation could include significant disruptions to civilian air traffic.”

Airlines based in Southeast and South Asia, such as Singapore Airlines and Thai Airways, are among those with frequent flights to Europe whose routes could potentially be affected by changes in air traffic patterns.

Airlines based farther north in Asia – such as in Japan, Korea and northern China – also have significant numbers of flights to Europe, but given their geography would generally fly north of the area anyway, aviation analyst Brendan Sobie told Al Jazeera.

Potential impacts on specific airlines may be hard to gauge in the short term, analysts say.

“Routings vary depending on weather, winds, airspace availability, etc. Some airlines will have longer flights on average due to this issue, but it can vary and would be hard to quantify,” Sobie said.

But following the latest crash in Iran, and with memories of the shooting down of Malaysia Airlines flight MH17 by a missile over Ukraine in 2014 – killing all 298 people on board – still fresh in the minds of pilots and their corporate bosses, most major airlines will likely consider rerouting their flights a price worth paying.